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The FCA’s new consultation paper makes cryptoassets hard to ignore. For any financial institution it’s time to seriously consider how cryptoassets might feature in your future portfolios. For companies active in the cryptoasset world, such as those operating exchanges, the consultation signals the need to adapt to a new and more structured world.
Until recently, mainstream financial advisors tended to sit on the sidelines regarding crypto investments, with many viewing the whole area as an unregulated ‘Wild West’. Investors to date have mostly been individuals who have worked out how to establish their own online wallet, plus a few institutions that have dipped a toe in the water on their own account
Meanwhile, the cryptocurrency industry has mostly gone its own way, without any interference from the financial establishment.
However, the recent publication of a consultation paper by the FCA looks set to change that in the UK. Far from pandering to calls for crypto investing to be shut down, the consultation will make it difficult for mainstream finance to ignore this type of asset. Arguably the FCA’s approach is more positive than that of some other regulators: for example, ESMA has put tight restrictions on cryptocurrency contracts for differences (CfDs).
Whether the FCA intends it or not, the consultation is likely to move cryptoassets a step closer to parity with other investments, by identifying a path towards their inclusion within the same regulatory environment. This will have two major effects:
- It will not be so easy for conventional financial institutions to dismiss cryptoassets as possible investments for their clients.
- Companies already active in cryptoassets will have to adapt to a new regulated world.
What steps should companies in both groups take to prepare for this new environment? We recommend a three-step approach.
Preparing for cryptoasset regulation
- Review the FCA’s consultation paper
At Bovill we concur with most of the FCA’s approach: for example, with the focus on the intrinsic nature of each cryptoasset, and the clear statement that assets don’t necessarily become securities just by being traded on secondary markets. We would suggest this is more logical than the SEC’s focus on how the asset was acquired.
It’s well worth taking time to review the paper, which we believe represents a logical and sensible approach to the topic.
- Help to shape the future
Emerging regulatory approaches differ between the US, Asia and other regions. The FCA is rightly keen to establish what a good regulatory environment for cryptoassets looks like. In particular, we applaud its attempts to figure out where to place the boundary between regulated and unregulated cryptoassets.
The more comprehensively readers respond to the paper, and to the specific questions the FCA has embedded in it, the more satisfactory the outcome will be. Both conventional financial institutions and those already active in the cryptoasset world should contribute if possible.
- Consider your own company’s stance
Financial institutions should take the opportunity to inform themselves about cryptoassets, and ponder what advice they will be giving to their clients in future. As the area becomes regulated, financial institutions will need at least to be aware of the pros and cons. They may still decide against advising clients to include these assets in their portfolios (for example on the grounds that the assets lack solid value, or have excessive volatility). However, they will need to be able to explain that decision convincingly. For advisors that decide to take cryptoassets on board, it’s important to consider the wider implications. For example, recognition of these assets is starting to create a parallel trading infrastructure to the established exchanges and trading platforms with the emergence of multilateral trading facilities (MTFs). As these MTFs become regulated, they may disrupt the status quo.
In the meantime, cryptoasset players need to be thinking about how they will achieve and demonstrate compliance with future regulations – something that will require new processes and extensive cultural change.
How Bovill can help
Currently, few mainstream institutions have much expertise in the cryptoasset area. Bovill has been active in cryptocurrency and blockchain for some time and can help institutions get up to speed, for instance via courses or informal coaching.
We have been helping cryptoasset specialists, such as those operating exchanges, to adapt to the demands and expectations of regulators. For example, we’ve collaborated with them on roadmaps for achieving compliance with the various regulations.
It’s important that those in the know help the authorities to design the future environment, and Bovill is happy to help any interested parties to put together their responses to the FCA’s consultation paper and similar initiatives by other regulators.
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